How To Start A Business With No Money

It takes money to make money… or so the saying goes. But the rise of today’s bootstrapped, dorm-room startups and microbusinesses suggest otherwise.

How to Start a Business with No Money

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66% of Forbes’ 2016 World’s Billionaires started their empires with nothing but their wit and meager savings.

But what if your savings isn’t enough for your business idea?

What if you don’t have any savings at all?

Yes, you can still start a business. But don’t expect the bank to loan you money.

The Challenge in Seeking Capital

  • In 2013, only 29% of small businesses applied for a loan
  • In 2015, only 24% of small businesses applied for a loan, a 5% decrease in just two years
  • In New York, 20% of small business owners didn’t apply because they got discouraged

Although banks are more lenient now, compared to the Great Depression of 2008, more entrepreneurs are veering away from the traditional banking route.

Why?

The 2013 Regional Survey from the Federal Bank of New York gives a hint:

  • Only 37% of small business owners applied for a credit or loan,
  • But 40% either got rejected or received less than half of what they need.

So aspiring and new business owners got creative.

Raising Capital 2.0

2014 data from the National Venture Capital association showed that startup funding came from one or more of these sources:

  • Venture Capital: 1%
  • Line of Credit: 41%
  • Friends and Family: 24%
  • Crowdfunding: 3%

Other small businesses not in the startup scene are also catching up. The Small Business Administration (SBA) 2012 survey says they got funding from:

  • Financial companies: 36%
  • Bootstrapping: 82%
  • Mezzanine (unsecured debt) and buyouts: 9%
  • Angel investor: 2%
  • Small Business Innovation and Research (SBIR) grant: 3%

So is lack of capital the only barrier stopping you from being your own boss?

These alternative financing options can help you start a business.

Alternative Lending Options

1. P2P Lending

P2P lending platforms connect capital raised from institutional and retail investors to help new and aspiring entrepreneurs.

Popular P2P platforms offer the following rates for business loans:

  • Funding Circle: $25,000 to $50,000 at 7% to 36% APR
  • Lending Club: $5,000 to $30,000 at 8% to 35% APR
  • Street Shares: $25,000 to $100,000 at 8% to 25% APR

P2P sidesteps banks because the funds come from another source, that’s why they don’t require collateral and too much paperwork.

But that doesn’t mean anyone with a business idea can borrow money. Applicants need:

  • 600 minimum credit score
  • Annual revenue of
    • Funding Circle: /$0
    • Street Share: $25,000
    • Lending Club: $75,000

And these are just basic requirements to get your loan listed in their lending marketplace. It’s up to their investors if they will loan you the entire amount you need.

Not sure crowdfunding is for you? Try

2. SBA Backed Loans

The SBA partners with banks and other financial institutions to guarantee loans for entrepreneurs in need of working capital.

SBA can guarantee:

  • 85% of loans up to $150,000
  • 75% of loans up to $3.75M

Sounds awesome, right? Your business idea should meet their guidelines, including:

  • Some industries have a limit of 1500 employees, others only allow 250
  • Some SBA loans require collateral

And because the government is backing these loans, expect:

  • Higher interest rate compared to traditional bank loans
  • Longer processing time

3. Payment Platforms

Are P2P platforms and SBA loans not for you? There’s a growing trend in payment platforms.

They’re now loaning money to the businesses they work with.

PayPal offers a working capital loan to eligible entrepreneurs with:

  • 3 months or older Business or Premiere account
  • $20,000 in annual sales for Premiere accounts
  • $15,000 in annual sales for Business accounts

$15,000 in annual sales might seem a lot for new entrepreneurs, but it’s still $10,000 less than Street Share’s requirement.

Just think of the $15,000 as a feasibility test of your business idea, or a test run.

PayPal’s lax requirement matches their loan offer:

  • 25% of your annual PayPal sales for a maximum amount of $25,000

But PayPal’s easy repayment scheme is good news for cash-strapped owners:

  • You can pay as little as 10% of every sale processed
  • Or pay the maximum 30% for every sale to minimize the fees paid

Square, a Point-of-Sale system, also offers business loans. As of 2016,

  • Square Capital has loaned over $1B
  • Financed over 100,000 small business owners since the lending program started

And their requirements are more beginner friendly compared to PayPal:

  • Active Square user
  • $10,000 revenue a year
  • Have a mix of new and returning customers

Unfortunately, you can’t apply for a loan. They will just offer it to you if you’re eligible. Their loan terms are not for everyone though:

  • $1,000 to $100,000 loanable amount
  • 18 months maximum repayment term
  • Pay 0.13 cents fee for every $1 borrowed

Non Lending Options

Borrowing money isn’t the only option to start your dream business. If your idea serves a real need, other people can fund it for you.

Here are your options:

1. Crowdfunding

Crowdfunding platforms like Kickstarter and Indiegogo have helped so many bootstrapped business owners get their business from idea to manufacturing to worldwide fame.

  • Only 3% of businesses use crowdfunding according to National Venture Capital Association
  • But it’s a $5 billion industry
  • Crowdfunding campaigns raise over $2 million a day

While rapidly growing, crowdfunding isn’t suitable for all types of business because people are selective of the products they fund.

That’s why

  • Only 44% of Kickstarter projects reach their funding goal
  • A measly 9.3% of Indiegogo campaigns are fully funded

Only innovative and creative products make it big in crowdfunding, such as:

  • Pebble e-Paper Watch: raised $10.2M out of original $100,000 goal
  • World’s Best Travel Jacket by Baubax: Raised 9.2M out of the original $20,000 goal
  • Fidget Cube: raised $6.4M out of original $15,000 goal

Not planning to create a consumer product? Is your business more of a software, app, or online service?

2. Venture Capital (VC)

If your idea meets the following criteria, a VC investment might be for you:

  • Address a Market Gap
    Hotlink raised $10M from VC investors by creating a software to help businesses share their virtual data center infrastructure with other businesses.
  • Need a Huge Investment
    VCs want to invest a minimum of $3 million.
  • Target a Big Market
    Startup JOOR raised $20.5 million from VCs because they tapped into the $350 billion luxury fashion market.
  • Scalable and High-Earning
    VCs are only interested in scalable business ideas with the potential to grow beyond the $10M revenue mark.

VCs used to jump at the opportunity to fund ‘hot’ new ideas, but because 75% of VC-backed startups fail, they’re now more stringent.

Is your business not ready for major cash infusions? There’s another option for you…

3. Angel Investors

Angel investors have similar criteria as VCs, except that:

 Angel InvestorsVenture Capital Firms
Decision-makers1 investorBoard of Directors
Money invested$127,000 median investment from 1 angel group$3 million minimum from 1 VC firm
Time to decide1 meetingMultiple meetings and presentations

Angels are great source of working capital or seed funding for your idea, as long as your business is in one of the industries that get the most percentage of Angel deals:

  • Software: 34.3%
  • Healthcare: 17.3%
  • Business Products and Services: 13%
  • Internet and Mobile: 11.2%

Businesses in the following industries get the least Angel support:

  • Computer Hardware and Services: 1.4%
  • Food and Beverage: 1.6%
  • Offline Retail: 1.1%

Like VCs, Angels will take equity and a hands-on approach in growing your business. So if you’re not ready to share control and get feedback, you’re better off with another financing option.

4. Government Grants

This is possibly the hardest type of funding to get, because unlike crowdfunding and private investment, all the grant applicants are competing for the same pool of money.

Data from the SBIR’s grant applications confirms this:

  • Only 21% of 5,451 applicants received a grant in 2014
  • And it didn’t get better as only 15% of 5,951 applicants got approved in 2016

Good news is there are thousands of grants in the U.S. alone, so you just have to find one you’re eligible for.

Grant eligibility is often based on:

  • Gender: InnovateHer Grant
  • Industry: Tesla’s Grant
  • Location: state and government grants

5. Bootstrapping

Now here’s a financing option where you can’t get denied, or rejected. You’ll use your own money to create a minimum viable product (MVP) or get your first client, if you’re starting a service-based business.

Bootstrapping won’t work for some types of business though:

  • Products that require tons of machinery and manpower to profit
  • High-barrier industries: oil and gas mining, telecommunications, and banking

Successful bootstrapped businesses often:

  • Don’t Need Outside Funding to Manufacture
    Sara Blakely launched Spanx using $5,000 from per personal savings. She also filed the patent application on her own to avoid legal fees. She still owns 100% of Spanx.
  • Only Require a Small Team
    Online services can often be launched with a small team to reduce labor costs, so funds are only used for necessary business-related expenses. Litmus Founders Paul Farnell, David Smalley, and Matthew Brindley started the email-testing tool in 2005 with a used computer and $800 dollars. Now they have over 250,000 customers and more than $1 million in revenue.
  • Can Start as a Side Gig
    Ignacio Galarraga started NetMen Corp as a one-man design agency on Elance (now Upwork) in 2002. Two months later, he hired his first graphic designer when he couldn’t handle his workload. The NetMen Corp has completed over 16,000 jobs and earned over $5 million doing graphic design and branding services online.
  • Serves a Real Need
    Freshbooks Founder Mike McDerment only had 10 customers paying $99 a month during the first two years of operation. But the cloud-based accounting service filled a real need for small business owners that wanted to do their own bookkeeping. Today, they have over 10 million users and paying customers in 120 countries.

With bootstrapping and all these financing options, it’s impossible not to raise even a small working capital. You can start bootstrapping your business idea immediately, or just research any of these financing options, until you find one that’s suitable for your business idea.

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